Hedge fund ghetto — that ironic term for certain buildings clustered in neighborhoods like the one around the Plaza Hotel in midtown Manhattan and the one near the train station in Greenwich, Connecticut — has taken on a more literal meaning recently.
With the HFRI composite index down 18.8 percent in 2008 and industry assets shrinking, downsized hedge funds are starting to sublet their spaces. Leases aren’t reverting en masse to lenders, but the concentration of hedge funds in some neighborhoods does present problems for landlords and developers, particularly in new or newly rehabilitated buildings. Peter Sabesan, a principal at New York–based Hunter Realty, which represents small and midsize tenants, doesn’t mince words in describing the hedge fund office space market: “It’s in the toilet.”
He adds: “Buildings that were asking $100 to $125 a square foot are now doing deals in the $70-to-$80 range. There aren’t that many people shopping for high-end hedge fund space right now.”
The offices most vulnerable are new ones — those that were going up as the market was coming down.
“The one building that is having a tough time right now is 510 Madison Avenue,” says David Hoffman Jr., principal and executive managing director of Colliers ABR, a real estate firm based in midtown Manhattan that counts hedge fund tenants throughout metropolitan New York among its clients. The building in question was developed by Macklowe Properties, which last year was forced to sell its crown jewel, the General Motors building, to service debt. The Madison Avenue property was designed specifically with hedge fund types in mind. It features column-free office space, a restaurant, a garden terrace and a fitness center.
In Greenwich, Hoffman says, you can hear a pin drop most days in the commercial real estate world. Space in two buildings that rented primarily to hedge funds in 2007 and 2008 is back on the market. One of the properties, 100 West Putnam Avenue, which is called the United States Tobacco building after its former owner, had three hedge funds as primary tenants: Strategic Value Partners, Plainfield Capital Management and Duff Capital Advisors. According to Hoffman, Plainfield and Duff are looking to sublease. (Neither firm returned calls.)
Notes Hoffman: “You have 160,000 square feet that was leased to three hedge fund tenants, and two out of the three have some or all of their space on the market for sublease.”
